The Pr.commissioner Of Income-Tax-4 v. M/S. Larsen And Toubro Ltd. … Respondent…

IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTIONINCOME TAX APPEAL NO. 421 OF 2015 The Pr.Commissioner of Income-Tax-4 … Appellant vs. M/s. Larsen and Toubro Ltd. … Respondent…....... Mr.Suresh Kumar for the Appellant. Mr.J.D.Mistry, Senior Advocate a/w. Mr.A.K. Jasani for the Respondent …....... CORAM : A.S. OKA & A.K. MENON, JJ.DATE : 6[th] NOVEMBER, 2017 JUDGMENT ( Per A. K. Menon) 1.In this appeal under section 260A of the Income Tax Act, 1961 beingaggrieved by the order dated 27[th] August, 2014 in ITA/4771/Mum/2005 bywhich the revenue's appeal was dismissed in relation to assessment year1997-98, the revenue is in appeal before us. Cross appeals were filed in thematter of orders passed under Section 143(3) read with Section 147. By acommon order passed in appeals, the Tribunal allowed the appeal of theassessee in part and dismissed the appeal of the Revenue. 2.The assessee was aggrieved by reopening of the assessment underSection 147 as also disallowance of a claim of depreciation in respect of itsclinker/cement factory at Gujarat. The assessee had claimed depreciation in respect of the machinery installed and put to use in the production of cement.A trial run was conducted for one day and the quantity produced was small.The assessee was apparently unable to establish that after the trial run,commercial production of clinker was initiated within reasonable time.According to the Assessing Officer, trial runs continued till October, 1997before a reasonable quantity of cement was produced. 3.According to the Assessing Officer, use of machinery for trial productionwas not for the purpose of business and therefore depreciation could not beallowed. The Assessing Officer disallowed the claim for depreciation on theground that the plant was only used for trial runs. The Assessing Officer hadfound that the trial runs continued till October 1997 and this fact had notbeen controverted by the appellant nor had the appellant produced anyevidence to show as to when exactly commercial production commenced. 4.In appeal, the Commissioner of Income Tax (Appeals) confirmed thedisallowance finding that there was a long gap between the first trial run,subsequent trial runs and commercial production. The CIT (Appeals)confirmed the disallowance by concluding that the user of the assets duringthe year should be actual, effective and real user in the commercial sense andthat some technical snag had developed in the plant and therefore the trialrun was stopped. 4.In appeal, the Commissioner of Income Tax (Appeals) confirmed thedisallowance finding that there was a long gap between the first trial run,subsequent trial runs and commercial production. The CIT (Appeals)confirmed the disallowance by concluding that the user of the assets duringthe year should be actual, effective and real user in the commercial sense andthat some technical snag had developed in the plant and therefore the trialrun was stopped. 5. The Tribunal found that there was no merit in the action of theauthorities below in denying the claim of depreciation and the Tribunal reliedupon an order of this Court in CIT vs. Industrial Solvents & Chemicals Pvt.Ltd., (Mumbai)[1] In the facts of that case it was found that in respect ofassessment year 1962-63, construction of the Assessee's building and erectionof the plant and machinery were completed by end of December, 1960 /January, 1961. The plant was initially charged with raw material in February1961, but the finished product was not in marketable state. The questionbefore the Court was, on the aforesaid facts whether the assessee could have“set up” business by August, 1961 and therefore entitled to expenses incurredthereafter, as expenses incurred in the course of business. The AssessingOfficer found that the erection of the plant was completed in the month ofMarch 1961 and trials commenced which continued upto September, 1961and expenses claimed came to be disallowed on the basis that this wasexpenditure only on experiments preparatory to the commencement of thebusiness and not for carrying on the business. This Court thereafterconsidering various decisions held in favour of the assessee came to theconclusion that by installation and erection of machinery in that case theassessee had set up his business by 19[th] August, 1961 was entitled to theexpenses incurred thereafter as expenses incurred in the course of itsbusiness. 1119 ITR 615 6.In the present case the Tribunal, after having considered the orderspassed by the Assessing Officer and the CIT (Appeals) was of the view thatthere was no merit in the denial of depreciation in respect of plant andmachinery and that even if the same was to be used for trial productionbusiness of manufacture of 'Clinker', the assessee would be entitled to claimdepreciation. The Tribunal also relied upon the decision of the Gujarat HighCourt in ACIT vs Ashima Syntex[2] which held that even trial productionwould fall within the ambit of “used for the purpose of business” and onceused the assessee could not be deprived of the benefit of a claim fordepreciation merely on the basis that the period of use was very short. 7.The Tribunal followed the decision of this Court in Industrial Solvents(supra) and heldthat once the plant commenced operations and a reasonablequantity of product is produced, the business is set up even if product wassub-standard and not marketable. In the case of Industrial Solvents (supra),the Company was new and depreciation was allowed. Following the aforesaiddecision the Tribunal directed the Assessing Officer to verify the period of useand restrict depreciation to 50% if the Assessing Officer found that themachinery was used for less then 180 days during the year underconsideration. 8.In facts of the present case, we find that the issue is no longer resintegra in view of the decision of Industrial Solvents & Chemicals (P) Ltd.2251 ITR 133 (GUJ) (supra). We have no hesitation in holding that the Order of the Tribunalcannot be faulted inasmuch as the jurisdictional High Court has already heldthat once plant commences operation and even if product is substantial andnot marketable, the business can said to have been set up. Mere breakdown ofmachinery or technical snags that may have developed after the trial runwhich had interrupted the continuation of further production for a period oftime cannot be held ground to deprive the assessee of the benefit ofdepreciation claimed. 8.In facts of the present case, we find that the issue is no longer resintegra in view of the decision of Industrial Solvents & Chemicals (P) Ltd.2251 ITR 133 (GUJ) (supra). We have no hesitation in holding that the Order of the Tribunalcannot be faulted inasmuch as the jurisdictional High Court has already heldthat once plant commences operation and even if product is substantial andnot marketable, the business can said to have been set up. Mere breakdown ofmachinery or technical snags that may have developed after the trial runwhich had interrupted the continuation of further production for a period oftime cannot be held ground to deprive the assessee of the benefit ofdepreciation claimed. 9. Other question proposed by the Revenue is in relation to computationof book profit under Section 115 JA of the Income Tax Act. The AssessingOfficer had held that the provision is toward unexpected liability andtherefore was required to be added to the book profit under Section 115JA ofthe Income Tax Act. The CIT appeals deleted the addition. It was found thatitem in question was not an item of profit and loss account but was an item ofthe Trading Account. This aspect we find had been called into question inIncome Tax Appeal (L) No. 2010 of 2006 in respect of year 1988-89 andwhich has been dismissed albeit on the ground of limitation. In the result, inour view no substantial questions of law arise for our consideration. Hence theappeal is not entertained. The appeal is accordingly dismissed. No costs. (A.K. MENON, J.) (A.S. OKA, J.)